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Nuances of International ETF

01 Sep 2023

Introduction

Are you an Indian investor looking to explore new investment opportunities? International Exchange-Traded Funds (ETFs) might be the perfect avenue for you. These investment instruments have gained immense popularity in recent years due to their potential to provide exposure to global markets and a diversified range of assets. Today, we will walk you through International ETF types and some associated rules and regulations.

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Different Types of International ETFs

Global ETFs:

These ETFs invest in securities from all over the world, including India. They provide exposure to the global market as a whole and can help reduce country-specific risks. An example of this ETF available in India is the Motilal Oswal S&P 500 Index Fund. This scheme tracks the performance of the S&P 500 index, a widely followed benchmark of the US stock market.

Regional ETFs:

These ETFs invest in securities from a specific region, such as Asia, Europe, or Latin America. They provide exposure to a particular region's economic and political trends and can help capture the growth opportunities of emerging or developed markets. An example of a regional ETF available in India is the Edelweiss Greater China Equity Off-shore Fund, which invests in companies from China, Hong Kong, and Taiwan.

Country-specific ETFs:

These ETFs invest in securities from a single country, such as the US, Japan, or Germany. They provide exposure to the performance and potential of a specific country's market and can help take advantage of favorable economic conditions or currency movements. An example of a country-specific ETF available here is the Nippon India Japan Equity Fund, which invests in companies from Japan.

Thematic ETFs:

These ETFs invest in securities related to a specific theme, such as technology, healthcare, or energy. They provide exposure to the growth prospects and innovation potential of a particular sector or industry and can help tap into the emerging trends and opportunities in the global market. An example of a thematic ETF is Franklin India Feeder - Franklin U.S. Opportunities Fund. This scheme invests in companies from the US that are leaders or emerging leaders in their respective fields.

Rules & Regulations Regarding ETFs

Some of the rules laid down by the investment regulators on ETFs are as follows:

  • SEBI (Foreign Portfolio Investors) Regulations, 2019

These regulations provide the framework for registering and operating India's foreign portfolio investors (FPIs). FPIs invest in Indian securities on behalf of their overseas clients. FPIs can invest in international ETFs listed and traded on Indian stock exchanges, subject to certain conditions and limits. For example, FPIs can invest up to 10% of their assets under management (AUM) in international ETFs, and the total exposure of all FPIs to a single international ETF should not exceed 20% of its net asset value (NAV).

  • SEBI (Alternative Investment Funds) Regulations, 2012 

These regulations provide the framework for registering and operating alternative investment funds (AIFs) in India. AIFs invest in non-traditional assets, such as private equity, venture capital, real estate, etc. AIFs can also invest in international ETFs, but with various conditions and up to several limits. They can invest up to 25% of their AUM in international ETFs, and the total exposure of all AIFs to a single international ETF should be at most 10% of its NAV.

  • SEBI Circular on Overseas Investments by Mutual Funds

This circular was issued on June 3, 2022, revising mutual funds' norms for overseas investments. According to this circular, mutual funds can make foreign investments up to a maximum of USD 1 billion per fund house. However, there is an overall industry capping of USD 7 billion. This limit includes investments in international ETFs as well as other foreign securities. The circular also specified that mutual funds can invest only in those international ETFs with at least 95% of their assets invested in listed or traded securities.

These are some recent regulations or circulars regarding international ETFs in India. They aim to facilitate the participation of Indian investors in global markets while ensuring adequate safeguards and risk management. However, they also impose some restrictions and challenges for investors who want to invest in international ETFs. 

Conclusion

International ETFs can be valuable to your investment portfolio, offering exposure to global markets and diversification benefits. However, like any investment, it is essential to conduct due diligence, evaluate your risk tolerance, and align your choices with your financial goals. By understanding the intricacies of International ETFs and staying informed about global economic trends, you can make informed decisions contributing to your long-term financial success. 

 

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